A RioCan centre in Kingston, Ont.
It's an interesting time to be a real estate investment trust - money has been easy to come by on the capital markets, and the value of the properties so coveted in the industry have been driven lower by a sharp recession.
Analysts estimate more than a billion dollars have been raised by Canadian REITs in the last year, as they issued equity to shore up their balance sheets and prepare for future acquisitions at a time when their stock values hovered near 52-week highs.
"We think the next 18 months will be a very fruitful time for listed [property companies]" AMP Capital Brookfield chief investment officer Kim Redding said last week. "They are one of the few investors in the world that have capital."
RioCan - the largest REIT in Canada, which reports its quarterly results today - has partially tipped its hand already, saying it would make a "major" purchase in the United States in the coming months financed largely by the $150-million it has raised on the markets.
Scott's REIT chief executive officer John Bitove said his company will "certainly be a buyer," and Whiterock REIT has already jumped in by taking a large stake in an $82-million deal for Toronto office towers.
But what if the market isn't all that distressed? Third-quarter statistics from RealNet Canada Inc. hinted that a rebound is taking hold in Canadian commercial real estate markets after 18 months of contraction. If there aren't deals to be found, the REITs may have watered down their shares without giving shareholders any reason to hope for better payouts in the future.
"Most REITs have taken advantage of the open capital markets," said Mark Rothschild, an analyst at Genuity Capital Markets. "Most management teams have expressed confidence this capital will be used to take advantage of distressed opportunities - we believe that there will not be many extremely accretive acquisition opportunities and ultimately many of the recent offerings will prove dilutive."
And despite the rash of fundraising, Mr. Rothschild said the REITs face challenges in their everyday operations that should be highlighted over the next two weeks as they report earnings. Funds from operations - a key gauge of health - are expected to have slipped lower for the first time this recession for residential REITs, while the commercial REITs could see the second decline in a row.
"Fundamentals have softened across most Canadian markets as a result of the weakening economy ... vacancy rates have increased" he said.
Whiterock chief executive officer Jason Underwood said he'll continue looking for deals, but even if he can't find anything worth spending some of the $30-million his company raised, he feels better knowing that he has a cushion behind him should the broader market take another turn.
"REITs have raised all that money and you know they don't need a billion dollars to bolster their balance sheets," he said. "That doesn't mean it all needs to be spent at once - I'd characterize our outlook as cautiously optimistic, so it's not a bad thing to have some money in the bank."